Net Tax Debate Attends Harvard

If doing something requires too much political will, first do nothing.

Not that "Tolling the Superhighway: Debating the Prospects of E-Commerce Taxation" was a gathering of political minds. Indeed, when one audience member outed himself as a student at the Kennedy School of Government, some of his law-school comrades exchanged knowing glances.

It was as if the Pharisees had just discovered a Roman in their midst. The conference's two panel discussions inquired into the merits and drawbacks of taxing e-commerce and then into what form an e-commerce tax system eventually might take. As one might expect, given the 7,500 different sales and use taxes that now populate the American economic landscape, the answers varied. Most agreed that the present system of sales and use taxes desperately needs fixing.

Panelists described the current system as arbitrary, vast, complex and, at times, just plain strange.

Commissioner Stanley Arnold of the New Hampshire Department of Revenue offered one example: "In New Hampshire, we don't tax six doughnuts, but we do tax five doughnut holes." However much the panelists might want a redesign, the online retail tax system remains in a holding pattern. The 1998 Internet Tax Freedom Act enacted a moratorium on new Internet taxes -- one that most experts at the symposium agreed would probably be extended for at least another three to five years. Presently, thanks to a 1967 U.S. Supreme Court mail-order sales ruling that was reaffirmed in 1992, retailers are required to collect sales taxes only for those states in which they have a physical presence, or "nexus."

For purchases made across state and international borders, the compensation of lost sales-tax revenue is left up to the consumer, who technically must file a "use tax" for the same amount. Of course, few people even know about this legal obscurity; fewer still comply with it. As an editorial in The Economist put it earlier this year, "America's so-called tax-free e-commerce really amounts to mass tax evasion."

Moderator Jonathan Zittrain of Harvard summed up the current e-tax dilemma:

"The Internet Tax Freedom Act and the moratorium it contains is really quite peripheral. It's uncontroversial. The real points of contention are [how to handle] digital goods and the taxation of goods shipped across state lines.

Those issues have yet to be settled." Some proposed settlements were more radical than others. "We need to get rid of the sales tax. It's a dumb tax," said Hal Varian, dean of the University of California at Berkeley. "It's a 6 percent tax on 30 percent of consumption, which is equivalent to a 2 percent tax on everything."

Both Varian's proposed consumption tax - a tax on a consumer's income minus savings - and the European-style value-added tax proposed by the 's Charles McLure appealed to fans of simplicity and fairness. Also in their favor is the ease with which the proposals would fit into the e-commerce world. But the politicians and political strategists on the two panels had their own radical notions to impart to ivory-tower denizens. "You just cannot underestimate the political problems of implementing the perfect solution," says Robert Goldman, a Florida lawyer now working on a state bill to reform the structure of telecommunications tax law. "Academics come to us saying, 'This is the perfect system. You handle the politics of getting it through.'

But with politics, it's a war. To get politicians to vote for anything that even smacks of a tax increase is nearly impossible." The sales tax - which now represents 25 percent of state and local revenues and amounts to $770 per capita per year - dates back to the Great Depression, when declining property taxes necessitated stopgap revenue generators for state and local governments.

"It was an emergency tax, and many of those taxes were enacted with sunset laws.

They were not designed to be permanent," said panelist George Isaacson, tax counsel for the Direct Marketing Association. "It's also a form of double taxation. Of the 45 states that have sales and use taxes, 26 also have income tax. They tax you on the way in and on the way out." The symposium also tackled the issue of the telecommunications excise tax, which now averages out at 14 percent between federal and state cuts.

"This was originally put in as a tax on rich people to fund the Spanish-American War," says Grover Norquist, president of Americans for Tax Reform. "But the last time I checked, we won that war. ... The only industry that gets worked over more is liquor and tobacco. We ought to bring the discriminatory tax on telecom down to the level of sales taxes." Norquist is one of 19 members of the Advisory Commission on Electronic Commerce.

Empaneled by the Internet Tax Freedom Act, the commission has been charged with studying the e-tax question and reporting its recommendations to Congress.

Norquist says the report, which will be delivered to House Speaker J. Dennis Hastert on Wednesday, urges Congress to nix the federal 3 percent telecommunications tax. It also asks states for a radical simplification of their sales and use tax laws, requests that Congress define "nexus" more clearly for online retailers and asks Congress to extend the moratorium for another five years.

Because e-commerce represents 1 percent of retail sales in the U.S., panelists noted that there is still time to solve this problem before taxes lost to e-commerce sales represent large portions of state and local budgets. Goldman put it this way: "If the doomsayers are right and, ultimately, our tax bases are going to erode and we're going to feel the sidewalks crumble beneath our feet, that will start to get people to look. But that's probably what it will take."

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